The death of traditional wirehouses that's predicted periodically by industry experts is greatly exaggerated. Wirehouse advisers — those housed in the wealth management divisions of Merrill Lynch, Morgan Stanley, UBS and Wells Fargo — stay because they get support and brand recognition that independent broker-dealers and registered investment advisers cannot offer.
Retirement plan advisers are different. Most B-Ds and RIAs do not understand or cater to advisers who specialize in defined-contribution plans. The Department of Labor's conflict-of-interest rule highlighted the differences between wealth and retirement plan advisers, causing some firms to either beef up support or shore up protection.
But the so-called 401(k) aggregators, which are growing faster than the market overall, are attractive to elite plan advisers for several reasons. Demand for service from plan sponsors is growing while fees are declining, putting a greater emphasis on efficiencies. Most plan advisers are not proficient at managing a business, and few have well-thought-out, written succession plans. Aggregators can take over many noncore business functions and can offer more resources, such as in-house CFAs and ERISA attorneys, as well as lower-priced tools. Many aggregators are creating custom collective investment trust funds, which provide lower costs than unaffiliated advisers can offer.
Aggregators have different models. Some, including Captrust, NFP, SageView Advisory Group, Lockton Retirement Services and Arthur J. Gallagher & Co., acquire the practices of elite advisers using a combination of cash and stock, and act like a traditional wirehouse. Advisers become employees and can focus on what most do well — hunting for new opportunities. The question of succession planning is answered.
Other aggregators, like Global Retirement Partners, Pensionmark Financial Group, Strategic Retirement Partners and Resources Investment Advisors Inc., offer resources and better pricing on tools and investments while advisers continue to own their practice. All aggregators provide access to like-minded retirement plan advisers to compare notes and best practices, something that a few of the larger traditional B-Ds and RIAs also provide.
Though some independent generalist B-Ds like Cambridge Investment Research Inc. have increased support for retirement plan advisers, others have contracted, leaving their elite plan advisers wondering whether they need a B-D at all, especially since most of their compensation is fee-based. But even if advisers move purely to fees, they still need support and leverage, which is why the aggregators have been growing so quickly.
Like wirehouses, aggregators that acquire practices provide much of the back-office and administrative support, as well as access to integrated tools and technology and a built-in succession plan. Because of their size, both entities can employ expert support in the back office as well as the field.
But DC aggregators lack some key elements that traditional wirehouses enjoy.
While independent B-Ds may enjoy little brand recognition among potential clients, the vast majority of plan sponsors do not even know what a defined-contribution aggregator is, let alone how to determine which aggregator is better. Aggregators have a lot of work to do as a group to educate plan sponsors about what an aggregator is and what the benefits are of using an adviser affiliated with the firm. They also need to search for a better client-facing term than "aggregator" to define themselves.
And while most of the growth for aggregators will come from recruiting experienced plan advisers, very few have great training programs for staff or, more importantly, new advisers — an issue that plagues the entire financial services industry. Will they have the resources to recruit younger advisers and provide the training they will need?
Issues aside, look for 401(k) aggregators to grow as elite plan advisers look for 401(k)-specific back-office support, tools and leverage as the demand for services increases while fees continue to decline, providing a seamless success plan for some.